DP16049 Media Sentiment and Currency Reversals

Author(s): Ilias Filippou, Mark Taylor, Zigan Wang
Publication Date: April 2021
Keyword(s): currency reversals, currency risk premium, digital text, FX media news
JEL(s): C38, C55, F31, G11, G41, Z13
Programme Areas: Financial Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16049

Analyzing 48 foreign exchange (FX) rates and 1.2 million FX-related news articles over a 35-year period, using digital textual analysis, we find that a currency reversal investment strategy that buys (sells) currencies with low (high) media sentiment offers strong positive and statistically significant returns and Sharpe ratios. The results are robust and the strategy adds value over other currency premia determinants such as carry and momentum. Analysts' forecasts systematically mispredict the reversal strategy. This is the first paper to show that price reversals based on media sentiment are a well-defined feature of the foreign exchange market.